UK Economy Heading For Trouble?
The top economist at the Bank of England, Charles Bean, has warned that the recent global financial market turmoil could lead to a severe downturn in the economy of the UK. Events such as the problems at Northern Rock could do significant damage to the economy.
Mr Bean said it was possible that there could be a sequence of events generating a greater or more prolonged 'contractionary impact'. However, he did concede that the impact of the global credit crunch may not be as bas as thought, as the UK economy was starting from a strong position.
Bankers had not foreseen the chain of events that started with sub-prime lending in the US and led to stock market falls in the summer and the first run on a UK bank for over a century. The result has been that the banks have protected their cash and put a tight rein on lending. This has led to and will mean more tightening of household spending.
As households spend less, the shops take in less money and the economy begins to slow. In particular the housing market could suffer, and the signs are already there. Cheap mortgages and easy credit are a thing of the past. Mr Bean said that inflation is still a concern, with oil reaching a record $94 a barrel, fuel prices are on the way up on the UK's forecourts and food prices are also rising in supermarkets.
As the Bank of England has a target to keep inflation near to 2%, as long as there is a fear that it might go up again (its present level is 1.8%) there is no chance of a drop in the base rate (currently standing at 5.75%). "We cannot afford to relax on the inflation front," Mr Bean said.
The Bank increased the base rate to 5.75% in July and has left it untouched throughout the financial crisis that began in August. The US Federal Reserve has reacted differently, taking 0.75% of its interest rate - including 0.25% this week - dropping it to 4.5%. The dollar weakened and the pound strengthened as a result, reaching $2.08 to the pound - a 26-year high. The strength of the pound and the weak dollar may be good news for many Brits who head across the Atlantic on shopping sprees before Christmas, but it has taken its toll on the manufacturing sector, which has struggled to export goods to America, and anyone who sells to the US and is paid in dollars is suffering the consequences.
The gloom continued to deepen for the British economy with further evidence that the credit crunch and high interest rates are having an impact on growth. Manufacturers and High Street retailers had their worst month for almost 12 months in October and the housing market is cooling sharply. Clothing stores have been badly hit as the mild weather dampened demand for ranges for the autumn and winter. The manufacturing sector saw growth dip to a 10-month low in October, according to the Chartered Institute of Purchasing and Supply.
CBI chief economic adviser Ian McCafferty said: "The pace of growth in sales has consistently slowed since the summer, showing that the five interest rate rises are having an increasing effect on momentum as shoppers tighten their belts."
Published on November 8, 2007
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